It’s good to have Restricted Stock Units, even if you don’t know exactly how they work. But that lack of understanding can be intimidating and paralyzing, and we end up just floating along, letting the RSUs “happen” to us, instead of making sure we’re getting the most out of them. It’s a metaphor for life, really.

Maybe you received RSUs as part of your sign-on package, or you receive them regularly as part of your annual compensation review. Either way, you now have RSUs in your company, and probably some actual company stock, too. Perhaps more is coming each year. The “problem” isn’t going away…it might even be getting bigger.

So, let’s get on the same page and understand what RSUs are, and what they aren’t (notably, stock options). Then we we can figure out what decisions you have within your control to make sure the RSUs are working for you.

Please note: In this post, I am talking about public-company RSUs, like an Amazon or Google.

What are Restricted Stock Units and How Do They Work?

I feel as if the wheel is pretty darn well designed already, so let me simply re-use Mary Russell’s (the attorney and founder of Stock Option Counsel) definition of RSUs:

“Restricted Stock Units (“RSUs”) are not stock. They are not restricted stock. They are not stock options. RSUs are a company’s promise to give you shares of the company’s stock or the cash value of the company’s stock.”

While Ms. Russell mentions “cash value,” in my experience with clients, it’s usually company stock. (It’s up to you to decide to turn the stock into cash.)

Notice what they’re not? They’re not stock (though they become stock if you wait long enough). They’re not stock options (which involves a choice to purchase the company’s stock). They’re not restricted stock. (I encounter RSUs far more frequently than “restricted stock.” Damn these near-identical names!)

Vesting (that is, when will the stock actually be MINE?)

When an RSU turns into a share of company stock that you own, it is said to “vest.” So, the schedule on which the RSUs turns into stock for you is called the “vesting schedule.”

A typical vesting schedule: You receive 1000 RSUs. 350 vest (become company stock that you own outright) one year later. 250 vest the 2nd year. 250 vest the 3rd year. And 150 vest at the end of the 4th year. At the end of 4 years, assuming you stay at the company that whole time, you have received all 1000 shares of company stock. (Vesting schedules come in a variety of shapes and sizes.)

What Happens If I Leave My Company?

Generally, if you leave a company before some of your RSUs vest, you lose those RSUs (but not the stock that you own because of previous RSUs that already vested…those are yours).

How Taxes Work

When your RSUs vest, you pay ordinary income tax on the entire market value of the shares you receive (that is, the price you’d have to pay to buy the stock “normally” on the stock market).

For example, if 50 RSUs vest today, and your mom could buy the company stock today in her brokerage account for $300, then you effectively receive $15,000 in income, and owe taxes on it immediately.

Typically your company will handle the taxes on your behalf, by withholding taxes automatically, either from the RSUs themselves or in your next (nice and plump) paycheck.

Now you own company stock. When you sell it, what happens tax wise? You pay capital gains tax on however much the stock has gained since you acquired it (the vesting date). If the stock has lost value since you acquired it, then you have a capital loss that you can use to offset any other capital gains. (And here we quickly get into the nitty gritty of tax law, so I’ll end this discussion abruptly now.)

Keep in mind that if you are able to sell the stock immediately after vesting, you shouldn’t owe any additional tax on the sale, because there are no gains. You’ve already paid income tax on the value of the stock. The lesson here is: If you want to sell your company stock soon after receiving it via RSU, it’s quite likely you can do this without taking much of a tax hit.

Trading Windows

It is quite common for companies to impose “trading windows,” stretches of time throughout the year when you’re allowed to trade company stock (and, implicitly, stretches of time when you’re not). It’s a whole “inside trading” thing. The lesson here is: Know whether you are subject to trading windows, when they are, and/or how you are notified when the trading windows open up.

Think of RSUs like a Cash Bonus that You Spend on Company Stock

I find it helpful to think of RSUs as a cash bonus that you then use to buy company stock. I find this helpful because it highlights two of the most important aspects of RSUs:

If you receive a cash bonus, you presumably know you’re going to be taxed on that bonus as income, and that your company will usually withhold taxes on that income automatically. Well, same thing for RSUs.

You own the company stock now just like any other shareholder who bought it through the stock market (with the one exception of those “trading windows”). The same tax rules apply when you gift, donate, or sell it.

How Do They Best Fit into My Finances?

You really do have to measure the possibilities of your RSUs against the rest of your financial life. If you do nothing, RSUs will still turn into stock for you (that’s their raison d’être, after all), but whether that stock will make any meaningful difference to your life is quite another matter.

What You Can’t Control

You have to understand the things you can’t control in your financial life because they affect you, oftentimes a lot. But if I could have one wish as a financial planner, it’d be that people would not worry about things they can’t control and focus their energies and attention on the things they can.

So, what should you understand but (ideally) not waste your worries on?

The tax code, now or in the future

How the stock market performs, and in particular how your company stock performs

Your company’s financial health. Okay, at smaller companies or if you’re in a leadership position at a company, you might be able to affect this. But for many employees, this is simply out of your control.

Trading windows and other restrictions your company imposes. You might be able to negotiate some things (like the # of RSUs you receive), but probably a lot of these rules and restrictions are company wide and you, as an individual employee, are simply not influential enough to change.

When your RSUs vest, and therefore when you receive taxable income

What You Can Control

Your plan for your RSUs—and for your finances in general—should be inspired primarily by the parts of your financial life you can control. So, ask yourself the following questions, and hopefully they will help you come up with a plan for your RSUs.

What percentage of all my investments do I want to be in company stock? You might own other stocks, bonds, mutual funds, and cash across several accounts. If all that is worth $300,000, and your company stock is worth $30,000, then you currently have 10% of your investments in company stock. Personally (and professionally), I don’t like to go much above 5%. It’s an “all your eggs in one basket” thing.

When am I going to sell, donate, or give away the stock? This comes down to a decision on how much of your company stock you want to own (if you already own plenty, then the answer to this question is probably “ASAP”), when the company’s trading windows are, and maybe even when your next round of RSUs vest (if you want to always own a certain amount of company stock). Another way of getting to this answer to is ask yourself, “Would I buy the stock right now if I had cash?” If not, ask yourself: “Why am I not selling it?”

What am I going to do with the sales proceeds? If you received $30,000 worth of company stock, and you sell it, you now have $30,000 in cash. How can that best help you create the life you want? Do you need a cash cushion (emergency fund) to make your finances a bit safer? Are you saving for a home downpayment and this could leapfrog you closer to having the full amount?Do you not have a specific goal in mind but know that, generally, “money is good” so you want to squirrel it away in an investment account to be used…later….for something?

How am I going to pay the taxes due upon sale? If you sell your stock soon after receiving it, it’s likely that there won’t be much of a gain in the company stock. (Of course, keep in mind, that “loss” can also happen!). If there’s not much gain, there won’t be much tax. But let’s say you keep the stock and it rises a lot in value! When you sell, you need to pay for that gain. Where will that money come from? From the proceeds of the sale? From your cash reserves?

When should I leave my company? Alright, you don’t fully control that, but if you’re thinking of leaving your company and more RSUs will vest soon, do you want to stick around to get more stock? That’s the whole point of RSUs from a company perspective after all: company loyalty and employee retention.

How many RSUs do I have? Again, this isn’t fully under your control. But this is something you can and should negotiate when interviewing for a job or in your performance/salary reviews.

Are my RSUs going to push me into a higher tax bracket, or make me lose other benefits? This might happen if your RSUs are worth a lot of money, or if your “regular” income already places you near a “breakpoint” in the tax brackets. If you’re at risk of this, are there any other sources of taxable income whose timing you can coordinate with your RSU vesting schedule? Maybe you can influence when you receive a bonus, exercise your stock options, sell other investments, or receive income from a side hustle.

Although financial planning is largely a matter of “it depends!” I hope I’ve given you some tools to at least understand how your RSUs work and what impact they might have on your financial life. This might get a bit complicated, but keep in mind: more money can give you more power and more choice. And that is the beauty of money.

The next step is yours to take: making a plan for how to make the most of this good financial opportunity.

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.